I have a $80 minimum on my credit bill.
If I pay them $100, do the additional $20 go to the card's Principal or Interest?
If it goes to Interest, do I have to explicitly state that those $20 go to Principal?

6 Answers
6

If it is a credit card bill, the money goes towards your balance because on all of my cards, the interest for the month will show up as a line item that increases the balance. So all your payment goes towards the balance.

This is good because your interest is probably calculated daily, and any amount you can lower your balance will therefore lower the interest you have to pay.

Additionally, in the US the CARD act means that you payment must be applied to items with the highest interest rates first.

This is simply not true. While it varies between lenders, almost all will pay off interest first.
– DJClayworthNov 26 '10 at 14:42

3

If they're making the minimum payment, all of the interest for the current billing cycle has been paid. In that case (which is the questioner's case) the extra goes toward principal.
– mbhunterNov 27 '10 at 6:02

Not necessarily the case. Sometimes the minimum payment is less than the interest owing. Here is an example: creditcardreview.ca/…
– DJClayworthNov 29 '10 at 18:24

1

OK, from now on I'm prefacing everything generic I say with "in the US." Credit card companies in the US must disclose the payback time on each bill if only the minimum payments are met. "Until the sun burns out" is not a valid payback time option in this case.
– mbhunterNov 29 '10 at 20:43

1

@mbhunter - CARD requires just that - minimum payments must be more than accruing interest. OP is in Puerto Rico, which I believe is subject to the US banking laws.
– JoeTaxpayer♦Jan 18 '14 at 13:09

Isn't this true for a loan and not a credit line?
– MrChristerNov 25 '10 at 5:34

1

A credit line may have different terms. You can get into trouble with this stuff when you have multiple promotional credit lines, as payments will apply towards the highest rate balances as well.
– duffbeer703Nov 25 '10 at 18:53

There are some loan types where your minimum payment may be less than the interest due in the current period; this is not true of credit cards in the US. Separately, if you have a minimum payment amount due of less than the interest due in the period, the net interest amount would just become principal anyway so differentiating it isn't meaningful.

With credit cards in the US, the general minimum calculation is 1% of the principal outstanding plus all interest accrued in the period plus any fees. Any overpayment is applied to the principal outstanding, because this is a revolving line of credit and unpaid interest or fees appear as a charge just like your coffee and also begin to accrue interest. The issue arises if you have multiple interest rates. Maybe you did a balance transfer at a discounted interest rate; does that balance get credited before the balance carried at the standard rate? You'll have to call your lender. While there is a regulation in place requiring payment to credit the highest rate balance first the banks still have latitude on how the payment is literally applied; explained below.

When there IS an amortization schedule, the issue is not "principal or interest" the issue is principle, or the next payment on the amortization schedule. If the monthly payment on your car loan is $200, but you send $250, the bank will use the additional $50 to credit the next payment due. When you get your statement next month (it's usually monthly) it will indicate an amount due of $150. When you've prepaid more than an entire payment, the next payment is just farther in to the future. You need to talk to your lender about "unscheduled" principal payments because the process will vary by lender and by specific loan.

Call your lender. You are a customer, you have a contract, they will explain this stuff to you. There is no harm that can possibly come from learning the nuances of your agreement with them.